HR Headaches: Should I Choose a PEO or HRIS?

PEOs and HRIS represent different approaches for streamlining HR management. Both save companies time and money by taking on some of the HR responsibilities that would otherwise fall on your shoulders. But which one is right for your business?

A primary concern for many business owners is how to manage their human resources efficiently. While staff management plays a vital role in any organization, it can also be a massive drain on time and resources.

This is especially true for smaller companies that do not have a dedicated HR team or department, leaving the company open to risks.

Some common HR management challenges for growing businesses include:

• Attracting and retaining top talent
• Managing labor costs
• Maximizing productivity
• Administering payroll and benefits
• Complying with changing employment laws

As any seasoned business owner knows, growth comes with new responsibilities and sometimes more stress. Many business owners turn to professional employer organizations (PEOs) or human resource information systems (HRIS) to ease the burden.

Let’s look closely at PEOs and HRIS to see how they compare.

What is a PEO?

A professional employer organization is a company that provides HR services to businesses. These services include payroll, benefits, workers’ compensation, and compliance with employment laws. When you partner with a PEO, you outsource your HR responsibilities to them. Therefore, you do not need to hire an in-house HR team.

PEOs typically work on a co-employment basis. This means the PEO becomes the employer of record for your employees. However, you maintain control over how your employees are managed daily.

Most PEOs work exclusively with small to medium-sized enterprises (SMEs). They only take on clients with a certain number of employees (usually fewer than 50). This is because they must pool their resources to support multiple clients to offer the most competitive rates.

What is an HRIS?

A human resource information system (HRIS) is a software solution that help businesses automate and manage their HR functions. These systems are usually cloud-based, which means they can be accessed from anywhere and offer high scalability.

Unlike PEOs, an HRIS does not provide any additional services beyond the software itself. Therefore, you are still responsible for managing your staff.

Regardless, an HRIS can save you time by automating many everyday HR tasks, such as:

• Tracking employee time off
• Storing employee records
• Calculating payroll
• Administering benefits
• Managing performance reviews

An HRIS can be a good option for businesses of any size. However, it is particularly well-suited for small businesses that do not have the resources to outsource their HR or hire an in-house HR team.

Pros and cons of a PEO

Now that we have covered the basics of PEOs and an HRIS let’s take a closer look at the pros and cons of each option.

PEO positives

PEOs offer benefits that make them a compelling option for addressing HR administration challenges. Some of these include:

• Access to a comprehensive suite of HR services: PEOs can take on all your HR responsibilities, from payroll and benefits to compliance with employment laws. This can free up your time to focus on other aspects of running your business.
• Fast implementation: A PEO needs less time to get going than an HRIS because you do not have to install software and train your team. You can usually start using a PEO’s services within weeks.
• Cost savings due to economies of scale: PEOs can offer their services at a lower cost than most businesses could achieve on their own. This is because they spread the cost of their services across multiple clients.
• A potentially lower risk of errors: A typical PEO will have systems and processes to minimize errors. Therefore, you get the peace of mind of knowing well-equipped professionals are handling sensitive tasks like payroll, benefits, and record management.
• Compliance support: PEOs are experts in their field. As a result, they stay up-to-date on the latest changes in employment law. Partnering with a reputable organization can help you avoid costly penalties for non-compliance.

PEO disadvantages

Despite these advantages, PEOs are not without their drawbacks. Below are some of the potential disadvantages of working with a PEO.

• Loss of control: When you partner with a PEO, you outsource your HR responsibilities to them. Consequently, you might lose control of aspects like employee relations and benefits administration.
• Potential for high costs: While PEOs can help you save money on HR costs, the fees can still be significant. For instance, most PEOs will charge you a percentage of your payroll — in addition to other fees. Furthermore, you might be required to pay an exit fee if you terminate your contract with a PEO.
• Operational and cultural mismatch: When you partner with a PEO, your HR team will likely be off-site. As a result, they might not have the same in-depth knowledge of your business as an in-house team. This could lead to communication problems and a lack of understanding of your company’s culture.
• Data security issues: When you partner with a PEO, you entrust them with sensitive employee data. Therefore, it is critical to do your due diligence to ensure adequate security measures are in place to protect this information.

Pros and cons of an HRIS

As an alternative to a PEO, an HRIS offers several unique benefits.

HRIS benefits include:

• Increased efficiency: Unlike a PEO, which takes over HR tasks entirely, an HRIS requires you to handle HR tasks yourself. Nevertheless, it automates many repetitive and time-consuming tasks, such as payroll, benefits, and time off administration. Therefore, your team gets more time to focus on more strategic tasks.
• Greater flexibility: While PEOs may offer a one-size-fits-all solution, an HRIS allows you to tailor the system to meet your specific needs. For instance, you can choose which modules to add or remove depending on the size and needs of your business.
• Improved data security: When you use an HRIS, your employee data is stored on your servers. Therefore, you have greater control over who can access this information and how it is protected than you would with a PEO.
• Savings: HRIS are typically more affordable than PEOs because they do not require you to pay service fees. Moreover, many HRIS systems offer a pay-as-you-go pricing model, which allows you to only pay for the features you need.

However, choosing an HRIS instead of a PEO has its own set of drawbacks.

HRIS disadvantages include:

• Implementation and training costs: Setting up an HRIS can come with a significant upfront cost of implementation and training. You might even have to hire a specialist to help you get the system up and running.
• Ongoing maintenance: Once an HRIS is up and running, you must ensure it is regularly updated and maintained. Maintenance costs can eat a substantial chunk of your savings from using the HRIS.
• Less support: When you use an HRIS, you are essentially on your own regarding HR tasks. This autonomy can be problematic if you do not have the internal resources to handle these tasks effectively.

How to choose between a PEO and an HRIS

PEOs and HRISs attempt to solve the same problems with 2 different approaches. While a PEO simplifies HR management by outsourcing tasks, an HRIS system does so by automating them. Unsurprisingly, both options have pros and cons. Choosing one over the other will depend on your specific needs and preferences.

Use the questions below to gauge whether your organization will benefit most from a PEO or an HRIS.

Which HR issues are you looking to solve?

Mundane tasks like payroll and benefits administration can quickly bog down your HR team. If you are looking for a way to free up your team’s time, an HRIS might be the best solution. On the other hand, if you want a comprehensive solution that will take over most, if not all, aspects of HR management, you may want to go for a PEO.

How big is your HR team?

Automating HR tasks may save your team some time, but you still need people to use and manage the system. If your team is already struggling to keep up with your growing business needs, you might want to consider a PEO instead of an HRIS.

How much are you willing to spend on HR management?

Despite the implementation and maintenance costs, an HRIS is often more cost-effective than PEOs, especially in the long run. So, if you are running on a tight budget, you will likely save more with an HRIS than a PEO, even if hiring more in-house staff to manage the system.

How much control do you need?

If you prefer to have as much control over your employee data and HR processes as possible, an HRIS is the better solution. However, if getting maximum support outweighs the need for control, then a PEO is the way to go.

How much support do you require?

PEOs offer comprehensive HR support, making them ideal for businesses that do not have the internal resources to manage HR tasks effectively. If you need this level of support, a PEO is likely the better solution. However, if you are confident in your team’s ability to manage HR tasks, an HRIS may be a better fit.

Do you have concerns about data security?

Sharing sensitive employee data with a third-party service provider can be a security risk. So, if you are worried about data breaches, an HRIS would be the better solution, as it allows you to keep your employee data on your servers.

Which approach best aligns with your company culture?

Consider whether a hands-off or hands-on HR management approach would align with your company culture. If your culture values transparency and employee participation, keeping things in-house with an HRIS would be a better fit. On the other hand, if your company culture is more top-down, a PEO will be a safe bet.

So, which is the best option for you?

HR headaches are commonplace in the SME landscape. After all, as your business grows, so does the complexity of HR management. Fortunately, today’s market has the options you need to get ahead of the challenges.

As your business grows, so does the complexity of HR management.

PEOs and HRISs are viable solutions for managing HR effectively. However, deciding which is best for your company requires careful consideration of your needs, preferences, and the general pros and cons of each option.

To summarize, choose a PEO if you:

• Want a comprehensive solution that will take over most, if not all, aspects of HR management
• Need to streamline HR operations as soon as possible, which means you do not have the time to implement in-house software and train your team
• Need a high level of support from your HR service provider
• Are less concerned about losing control, compromising data security, or leaking institutional knowledge than you are about getting the support you need.

Choose an HRIS if you:

• Prefer to have as much control over your employee data and HR processes as possible
• Are confident in your team’s ability to manage HR tasks
• Are worried that sharing employee data with a third party will compromise control, data security, or institutional knowledge
• Cannot afford the recurring fees of a PEO
• Have a culture that insists on active employee participation in HR matters

Whichever route you choose, the most important thing is to select the solution that will give you the highest return on investment. If you are still unsure, click here for more insights.